The business of owning real estate for immigration...

1of3Security guards monitor the perimeter of the Southwest Key Casa Padre facility, formerly a Walmart Inc. store, in Brownsville on Sunday, June 17, 2018. Walmart says they didn’t know its former store would be used to house undocumented immigrants who are minors when they sold the property in 2016, though county deed records show that Southwest Key was financing the sale.Photo: Sergio Flores /Bloomberg

2of3San Antonio development company Koontz McCombs initially leased property to CoreCivic, formerly Corrections Corporation of America, to manage the South Texas Family Residential Center in Dilley when the center opened in 2014. It’s unclear who owns the property now.Photo: ILANA PANICH LINSMAN /New York Times

3of3The Southwest Key Casa Blanca facility, foreground, operates out of a $1.5 million mansion in the Timberwood Park subdivision near San Antonio.Photo: William Luther /San Antonio Express-News

The need to shelter people caught crossing the U.S.-Mexico border has become a cash cow for everyone from longtime prison operators like CoreCivic and The GEO Group to Texas executives, multinational energy corporations and real estate developers. The land and buildings that house immigrants in Texas are worth at least $357 million, according to county property records across the state.

CoreCivic and The GEO Group now say their primary business is real estate management, not operating detention centers — a distinction that has netted the companies big tax breaks and shareholders hefty returns.

Real estate investors are paying attention, too, trying to cater to the land needs of the companies and nonprofits that operate immigration detention facilities such as Austin-based Southwest Key Programs, said Ernest Brown, broker with Rohde, Ottmers & Siegel Realty Services.

“There may be more people looking for opportunities than there are opportunities actually there,” Brown said. “But the return could be pretty good and that’s why people are trying to chase it.”

Property managers, not prison operators

CoreCivic and The GEO Group maintain that their businesses have expanded beyond operating and managing private correctional facilities and into holding real estate assets.

The Internal Revenue Service agreed in 2013 when it allowed both companies to reorganize as “real estate investment trusts” — companies that own and often operate real estate holdings such as apartments, retail, health care facilities and hotels.

Congress created REITs in 1960, allowing investors to access portfolios with diversified real estate assets previously available only to the wealthiest of investors, said Ron Kuykendall, spokesman for Nareit, a national association representing REITs.

“The idea was to give all investors, investors like you and me, the ability to own commercial real estate,” Kuykendall said.

By restructuring as REITs, CoreCivic and The GEO Group slashed their corporate tax burden and boosted payouts to shareholders, according to filings with the U.S. Securities and Exchange Commission. The companies continue to operate their facilities through taxable subsidiaries.

“It’s a tax loophole that allows them to say that their primary business is owning buildings, their primary business isn’t operating prisons,” said Bob Libal, executive director of Austin-based advocacy group Grassroots Leadership. “Clearly their core function is operating prisons, not owning real estate.”

Both companies have a major footprint in Texas. According to its website, CoreCivic runs two immigration processing centers and two residential centers that operate under contracts with U.S. Immigration and Customs Enforcement. (In June, Williamson County commissioners voted to sever their contracts with CoreCivic and ICE for the T. Don Hutto Residential Center in Taylor, about 40 minutes northeast of Austin.)

The GEO Group runs two processing centers in Texas, two detention centers and a residential center — and is under contract with ICE to open a 1,000-bed processing center in Conroe in late 2018, its website says.

It’s a good deal for investors. Federal law mandates that companies classified as REITs distribute at least 90 percent of their taxable income to shareholders. To that end, stockholders in CoreCivic and The GEO Group have reaped $2.8 billion in dividend payments since 2013, according to an Express-News analysis of SEC filings.

And those benefits will likely grow under the new tax law signed in December. Lawmakers cut the 39.6 percent tax rate on investments in REITs to 29.6 percent.

The REIT designation also substantially cut the companies’ tax bills. In 2012, CoreCivic’s effective tax rate sat at 35.8 percent, according to a federal regulatory filing. That rate plunged to 6.2 percent in 2013 after the IRS ruling. The GEO Group’s effective tax rate fell from 40.4 percent in 2012 to 30.6 percent in 2013 after it became a REIT, a separate filing shows.

Real estate is an “essential core” of CoreCivic’s business, with land and buildings making up about 90 percent of the company’s fixed assets, company spokeswoman Amanda Gilchrist said in an email. According to a May earnings filing, the company owns $2.8 billion in property and equipment.

CoreCivic has expanded its portfolio beyond correctional and detention facilities into other kinds of government-leased assets, Gilchrist said.

“Our goal for converting to a REIT was to increase shareholder value and enable our company to provide high-quality services even more competitively,” Gilchrist said.

The GEO Group holds $2.1 billion in land and buildings across the U.S., according to an April earnings filing.

The company’s reorganization as a REIT “reflects the significant capital our company has invested in real estate assets, which provide the foundation for the high-quality services delivered throughout our facilities,” GEO Group spokesman Pablo Paez said in a statement.

Properties retooled

Detention centers and immigrant shelters are often just the latest use of an existing building.

Southwest Key Programs’ Casa Blanca shelter north of San Antonio operates out of a mansion in the Timberwood Park subdivision where David Spencer, CEO of Boerne’s Prytime Medical Devices Inc., once lived with his family. (An entity with Spencer as its registered agent signed a lease with Southwest Key in 2010).

Southwest Key leases a former Walmart Supercenter in Brownsville in which it runs its Casa Padre shelter for undocumented immigrants who are minors, its largest facility.

“If you find a property that has no use or you’re having a very difficult time finding a use and a use pops up like that, you’ve taken a nonproductive asset making no income into a productive asset making an income,” said Brown of Rohde, Ottmers & Siegel Realty Services.

Owners of big-box stores are increasingly on the hook to find new tenants for giant shell buildings as major retailers shutter stores in the Amazon era. Retailers announced plans last year to close nearly 7,000 stores, according to retail think tank FGRT.

“There are certainly lots of stores that are getting repurposed, that are going to have to be repurposed,” retail analyst Jan Kniffen said. “I don’t think many of them are going to wind up as detention centers, one would hope.”

The former Walmart in Brownsville was no longer profitable when the Arkansas-based retail giant closed 154 U.S. stores as part of a restructuring effort, company spokesman Randy Hargrove said.

“If the location is closing, it’s just part of actively managing our portfolio of assets,” Hargrove said. “That’s essential to maintaining a healthy business.”

According to a special warranty deed, Walmart placed restrictions on the property forbidding the space from being used as a grocery store, supermarket, wholesale club similar to a Sam’s Club, discount store, pharmacy, adult book or adult video store, bar or nightclub, among other uses.

In several tweets, Walmart has said it was “really disturbed by how our former store is being used … we had no idea it’d be used for this.”

But a Walmart executive signed the deed showing that Chacbak, a limited liability corporation owned by Brownsville developers Rafael Chacon and Mohamed Ryad Bakalem, was purchasing the property with a $4.5 million loan from Southwest Key, according to Cameron County records.

Representatives for Chacbak did not tell a real estate broker for Walmart that they intended to lease the building to Southwest Key or that the center would become a detention facility, Hargrove said.

It’s common for Walmart to vet potential buyers but not lenders, Hargrove said, citing common practice in commercial real estate transactions. A sale agreement reached between the two parties in September 2016 did not mention Southwest Key, he said.

“No one at the company foresaw that that former building was going to be used for what it is,” Hargrove said.

The owners

Limited partnerships and limited liability corporations can obscure who owns the properties where immigrant detention facilities operate, and most owners are loath to talk publicly.

South Texas Family Residential Center in Dilley was developed for oil field worker housing by San Antonio commercial real estate company Koontz McCombs.

It’s unclear from land records whether San Antonio billionaire B.J. “Red” McCombs still is affiliated with the property after he sold his stake in Koontz McCombs, now called Koontz Corp., in 2014.

Representatives for Koontz Corp. and McCombs Enterprises did not return multiple phone and email requests for comment.

Chacon and Bakalem, the Brownsville developers who own the land where Casa Padre operates, are listed on state filings for entities that own land on which three other Southwest Key facilities operate: Nueva Esperanza in Brownsville along with Casa Antigua and Casa Rio Grande in San Benito. Altogether, the pair have property valued at $12.5 million where Southwest Key maintains its facilities.

A group of limited partnerships and limited liability corporations based in Arizona and Utah own the Montezuma Key limited liability corporation, which bought the $2.6 million property where Southwest Key operates its Casa Montezuma shelter in Channelview, near Houston, in 2016.

At least one landowner has international ties. Petrosin Properties — an affiliate of Singapore-based energy firm Petrosin — holds the $2.7 million plot where Southwest Key’s Casa Houston facility sits. The company did not respond to an email requesting comment. William Rohrbach, a Houston lawyer listed as Petrosin Properties’ registered agent on state filings, did not return a message sent through his law firm’s website.

Bob Weathers — founder and CEO of Mesa, Ariz.-based Edupoint Educational Systems — is an owner and partner in Talbot Key Holdings, an entity that owns the $2.1 million lot in Canutillo, near El Paso, where Southwest Key operates a facility.

Weathers and his partners were “very interested in taking care of children that came in from South America” and other parts of the globe without their families when they bought the property in 2004, Weathers said.

“I do think that they (Southwest Key) do a terrific job there,” he said.

When asked how much he earns annually from leasing the land, Weathers said: “I don’t know.”